Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MCBC > SEC Filings for MCBC > Form 10-Q on 25-Apr-2013All Recent SEC Filings

Show all filings for MACATAWA BANK CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MACATAWA BANK CORP


25-Apr-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the FDIC. The Bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. These trusts are not consolidated in our Consolidated Financial Statements. For further information regarding consolidation, see the Notes to the Consolidated Financial Statements.

At March 31, 2013, we had total assets of $1.51 billion, total loans of $1.05 billion, total deposits of $1.23 billion and shareholders' equity of $132.9 million. During the first quarter of 2013, we recognized net income of $2.5 million compared to net income of $4.5 million in the first quarter of 2012. This represented our twelfth consecutive quarter (or three full years) of profitability. With the reversal of our deferred tax asset valuation allowance at December 31, 2012, our earnings for the first quarter of 2013 reflected tax expense while the first quarter of 2012 did not. Also impacting comparability between the two periods is a significant recovery on a previously charged-off loan in the first quarter of 2012, resulting in a larger negative loan loss provision in that period.

As of March 31, 2013, the Company's and the Bank's risk-based regulatory capital ratios were at the highest they have ever been. The Bank was categorized as "well capitalized" at March 31, 2013.

On April 12, 2013, the Federal Deposit Insurance Corporation ("FDIC") and the Michigan Department of Insurance and Financial Services ("DIFS"; formerly known as the Michigan Office of Financial and Insurance Regulation), the primary banking regulators of the Bank, notified the Bank that the Bank's Memorandum of Understanding ("MOU") with the FDIC and DIFS had served its purpose and was released. As a result, the Bank is no longer subject to any regulatory order, memorandum of understanding or other similar regulatory directive or proceeding and has returned to a normal regulatory operating environment.

The MOU documented an understanding the Bank reached with regulators in connection with termination of the Bank's former Consent Order on March 2, 2012. The requirements of the MOU which are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 are no longer applicable to the Bank. In particular, the enhanced regulatory capital requirements of the MOU no longer apply to the Bank and the Bank is no longer required to obtain the prior written consent of the FDIC and DIFS before the Bank declares or pays dividends.

We believe the FDIC and DIFS released the MOU as a result of: (i) the Bank's substantial compliance with the MOU, (ii) our implementation of enhanced corporate governance practices and disciplined business and banking principles,
(iii) substantial improvements in the Bank's asset quality, (iv) improved liquidity, (v) continued improvement in the Bank's financial condition and earnings performance, and (vi) Bank regulatory capital levels well in excess of the levels required to be classified as "well capitalized" for regulatory purposes and to comply with our MOU due to our successful capital raise and the Bank's retained earnings.

RESULTS OF OPERATIONS

Summary: Net income available to common shares for the quarter ended March 31, 2013 was $2.5 million, compared to net income of $4.5 million in the first quarter of 2012. Net income per common share on a diluted basis was $0.09 for the first quarter of 2013 and $0.17 for the first quarter of 2012.

The reduction in earnings in the first quarter of 2013 compared to the first quarter of 2012 is due to an unusually large negative provision for loan loss expense taken in the first quarter of 2012 resulting from a large loan recovery collected in the first quarter of 2012. The provision for loan losses was a negative $750,000 for the three month period ended March 31, 2013 compared to a negative $3.6 million for the same period in 2012. Also, with the reversal of the deferred tax asset valuation allowance at December 31, 2012, tax expense is no longer offset by valuation allowance reversals and we recorded $1.1 million in federal income tax expense in the first quarter of 2013 and none in the first quarter of 2012. We again were in a net loan recovery position for the first quarter of 2013, with $498,000 in net loan recoveries, compared to net loan recoveries of $1.4 million in the first quarter of 2012.

Operating results in recent periods have been significantly impacted by the expense associated with problem loans and nonperforming assets. Apart from the provision for loan losses, expenses associated with nonperforming assets (including administration costs and losses) were $1.0 million for the first quarter of 2013 compared to $3.1 million for the first quarter of 2012. Larger valuation writedowns on other real estate owned and higher levels of legal costs associated with nonperforming assets in the first quarter of 2012 were the primary reasons for the change between periods. Lost interest from elevated levels of nonperforming assets was approximately $728,000 for the three months ended March 31, 2013 compared to $1.1 million for the three months ended March 31, 2012. Each of these items is discussed more fully below.

- 34 -

Index

Net Interest Income: Net interest income totaled $10.5 million for the first quarter of 2013 compared to $11.3 million for the first quarter of 2012.

The decrease in net interest income in the first quarter of 2013 was due primarily to a decline in yield on our average interest earning assets. Our average yield on earning assets for the first quarter of 2013 declined 43 basis points compared to the same period in 2012 from 4.15% to 3.72%. Average interest earning assets totaled $1.35 billion for the first quarter of 2012 and 2013. The net interest margin was 3.14% for the first quarter of 2013 compared to 3.32% for the first quarter of 2012. The decline in the margin for the most recent quarter was driven by the reduction in our average yield on earning assets, partially offset by a reduction in the cost of average interest bearing liabilities. An increase of $61.6 million in average securities between periods partially mitigated the impact of reduction in average loan yield from 5.02% in the first quarter of 2012 to 4.42% in the first quarter of 2013.

The decline in yields on interest earning assets for the three month period ended March 31, 2013 was from decreases in the yield on our commercial, residential and consumer loan portfolios, which have repriced at lower levels in the generally low rate environment during this period. Our margin has been negatively impacted by our decision to hold significant balances in liquid and short-term investments during the past three years. As we deploy these balances in building our investment portfolio and booking high quality loans, we expect our margin to be positively impacted.

The cost of funds decreased 29 basis points to 0.74% in the first quarter of 2013 from 1.03% in the same period in 2012. A decrease in the rates paid on our deposit accounts in response to declining market rates and the rollover of time deposits and other borrowings at lower rates within the current rate environment caused the reduction in our cost of funds. Also contributing to the reduction was a shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts.

- 35 -

Index

The following table shows an analysis of net interest margin for the three month periods ended March 31, 2013 and 2012.

                                                 For the three months ended March 31,
                                          2013                                         2012
                                         Interest      Average                        Interest       Average
                          Average         Earned        Yield          Average         Earned         Yield
                          Balance         or paid      or cost         Balance        or paid        or cost
                                                        (Dollars in thousands)
Assets
Taxable securities      $   102,318     $     428           1.67 %   $    59,895     $      318           2.12 %
Tax-exempt securities
(1)                          24,889           142           3.73 %         6,194             42           4.73 %
Loans (2)                 1,055,578        11,668           4.42 %     1,069,052         13,526           5.02 %
Federal Home Loan
Bank stock                   11,236            99           3.52 %        11,236             85           2.99 %
Federal funds sold
and other short-term
investments                 154,682            96           0.25 %       203,905            128           0.25 %
Total interest
earning assets (1)        1,348,703        12,433           3.72 %     1,350,282         14,099           4.15 %

Noninterest earning
assets:
Cash and due from
banks                        21,615                                       21,362
Other                       136,404                                      126,371
Total assets            $ 1,506,722                                  $ 1,498,015

Liabilities
Deposits:
Interest bearing
demand                  $   257,241            81           0.12 %   $   210,507             97           0.18 %
Savings and money
market accounts             483,091           548           0.46 %       395,294            509           0.52 %
Time deposits               188,513           457           0.98 %       296,151          1,044           1.42 %
Borrowings:
Other borrowed funds         93,252           495           2.12 %       149,386            778           2.06 %
Long-term debt               41,238           369           3.58 %        41,238            390           3.75 %
Total interest
bearing liabilities       1,063,335         1,950           0.74 %     1,092,576          2,818           1.03 %

Noninterest bearing
liabilities:
Noninterest bearing
demand accounts             303,644                                      303,331
Other noninterest
bearing liabilities           7,802                                        6,584
Shareholders' equity        131,941                                       95,524
Total liabilities and
shareholders' equity    $ 1,506,722                                  $ 1,498,015

Net interest income                     $  10,483                                    $   11,281

Net interest spread
(1)                                                         2.98 %                                        3.12 %
Net interest margin
(1)                                                         3.14 %                                        3.32 %
Ratio of average
interest earning
assets to average
interest bearing
liabilities                  126.84 %                                     123.59 %

(1) Yield adjusted to fully tax equivalent.

(2) Includes average nonaccrual loans of approximately $15.4 million and $31.2 million for the three months ended March 31, 2013 and 2012.

- 36 -

Index

Provision for Loan Losses: The provision for loan losses for the first quarter of 2013 was a negative $750,000 compared to a negative $3.6 million for the first quarter of 2012. The large negative provision for loan losses in the first quarter of 2012 was primarily associated with a $4.4 million recovery on a previously charged-off loan. The negative provision for loan losses in the first quarter of 2013 was caused by a reduction in the balance and required reserves on nonperforming loans, stabilizing real estate values on problem credits and continued shrinkage in the overall loan portfolio, as well as net loan recoveries of $498,000 in the first quarter of 2013.

Net loan recoveries were $498,000 for the first quarter of 2013 compared to net loan recoveries of $1.4 million for the first quarter of 2012. The large loan recovery in the first quarter of 2012 was partially offset by $3.5 million in loan charge-offs. Most of the charge-offs taken during the first quarter of 2012 were from impaired loans with previously established reserves. In the first quarter of 2013, we had only $642,000 in charge-offs. The charge-offs for each period were largely driven by declines in the value of real estate securing our loans. The pace of the decline in real estate values, however, has been slowing, translating into a decline in charge-offs. We are also experiencing positive results from our collection efforts with loan recoveries increasing as evidenced by our net loan recovery positions in the first quarters of 2012 and 2013. Loan recoveries were $1.1 million for the first quarter of 2013 and $4.9 million for the same period in 2012. While we expect our collection efforts to produce further recoveries, the amount achieved in the first quarter of 2012 was unusually high.

We have also experienced a decline in the pace of commercial loans migrating to a lower loan grade, which receive higher allocations in our loan loss reserve, as more fully discussed under the heading "Allowance for Loan Losses" below. In addition to experiencing fewer downgrades of credits, we continue to see an increase in the quality of some credits resulting in an improved loan grade. Over the past two years, we have experienced improvements in our weighted average loan grade. We believe efforts that began in late 2009 and in early 2010 to improve loan administration and loan risk management practices have had a significant impact, ultimately allowing for the reduction in the level of the allowance for loan losses since then.

The amounts of loan loss provision in both the most recent quarter and comparable prior year period were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained lower level of quarterly net charge-offs over the past several quarters had a significant effect on the historical loss component of our methodology. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.

Noninterest Income: Noninterest income for the three month period ended March 31, 2013 increased to $4.0 million compared to $3.7 million for the same period in 2012. The components of noninterest income are shown in the table below (in thousands):

                                               Three Months      Three Months
                                                   Ended             Ended
                                                 March 31,         March 31,
                                                   2013              2012

Service charges and fees on deposit accounts   $         913     $         795
Net gains on mortgage loans                              825               471
Trust fees                                               588               609
ATM and debit card fees                                  976               981
Bank owned life insurance ("BOLI") income                170               223
Investment services fees                                 215               229
Other income                                             276               403
Total noninterest income                       $       3,963     $       3,711

Service charges on deposit accounts increased for the three month period ended March 31, 2013 due, primarily, to an increase in overdraft activity from our customer base. We recognized a significant increase in gains on sales of mortgage loans for the first quarter of 2013 due to increased focus on growth in our residential mortgage loan origination volume. The low interest rate environment has also contributed significantly to this increase in sales volume. Partially offsetting these increases in noninterest income are small decreases in trust income, BOLI income and investment service fees as a result of market conditions and investment balances.

- 37 -

Index

Noninterest Expense: Noninterest expense decreased to $11.6 million for the three month period ended March 31, 2013, from $14.1 million for the same period in 2012. The components of noninterest expense are shown in the table below (in thousands):

                                                    Three Months       Three Months
                                                       Ended              Ended
                                                     March 31,          March 31,
                                                        2013               2012

Salaries and benefits                              $        5,794     $        5,720
Occupancy of premises                                         946                971
Furniture and equipment                                       749                828
Legal and professional                                        189                212
Marketing and promotion                                       247                210
Data processing                                               352                351
FDIC assessment                                               471                710
ATM and debit card processing                                 291                288
Bond and D&O insurance                                        186                268
Administration and disposition of problem assets              961              3,058
Outside services                                              369                378
Other noninterest expense                                   1,026              1,113
Total noninterest expense                          $       11,581     $       14,107

Several components of noninterest expense experienced a decline due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased slightly in the first quarter of 2013 from the first quarter of 2012. We had 365 full-time equivalent employees at March 31, 2013 compared to 382 at March 31, 2012. The increased expense for the first quarter of 2013 was primarily attributable to the reinstatement of our 401k plan matching contributions beginning with the first quarter of 2013. This expense totaled $154,000 for the first quarter of 2013. In addition, effective with the second quarter of 2012, our board authorized a cost of living increase for the first time in several years, which resulted in an increase in compensation expense in the first quarter of 2013 compared to the first quarter of 2012. Incentive compensation programs have been implemented for certain departments in 2013, which have also increased compensation expense.

The next largest noninterest expense was our cost related to administration and disposition of problem assets. Costs associated with administration and disposition of problem assets include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net losses on the sale of properties and unrealized losses from value declines for outstanding properties. We experienced significant decreases in each of these expense categories in the first quarter of 2013 compared to the same period in the prior year.

These costs are itemized in the following table (in thousands):

                                                     Three Months      Three Months
                                                         Ended             Ended
                                                       March 31,         March 31,
                                                         2013              2012

Legal and professional - nonperforming assets        $         166     $         441
Repossessed and foreclosed property administration             736             1,021
Losses on repossessed and foreclosed properties                 59             1,596
Total                                                $         961     $       3,058

Losses on repossessed assets and foreclosed properties decreased significantly for the three month period ended March 31, 2013, decreasing $1.5 million from the same period in 2012. The writedowns for each period have largely been driven by declines in the value of real estate. The pace of the decline in real estate values, however, has been slowing, translating into a decline in writedowns. During the first quarter of 2013, we realized net gains on sales of foreclosed properties of $320,000, mostly offsetting the $379,000 in valuation writedowns during the quarter.

Costs associated with administration and disposition of problem assets decreased due to the decrease in the level of other real estate owned. Other real estate owned decreased from $66.2 million at March 31, 2012 to $51.6 million at March 31, 2013. As our level of problem loans and other real estate owned decreases, we believe we will experience more reductions in these costs going forward.

- 38 -

Index

FDIC assessments decreased by $239,000 to $471,000 for the first quarter of 2013 compared to $710,000 for the first quarter of 2012 as a result of our reduced level of deposits and due to a change in our assessment category resulting from the termination of the Bank's Consent Order effective March 2, 2012. With the termination of the Bank's MOU by the FDIC and DIFS effective April 12, 2013, we expect further reductions in FDIC assessments in future periods.

We realized an $82,000 reduction in our bond and D&O insurance costs in the first quarter of 2013 compared to the first quarter 2012 as a result of our improving financial condition and the decreased risk perceived by our insurance carriers.

Federal Income Tax Expense: We recorded $1.1 million in federal income tax expense for the three month period ended March 31, 2013 and none in the first quarter of 2012. From June 30, 2009 to December 31, 2012, we had concluded that a full valuation allowance needed to be maintained for all of our net deferred tax assets based primarily on our net operating losses in 2008 and 2009 and the continued challenging environment confronting banks that could negatively impact future operating results. With the termination of the Bank's Consent Order the Company's Written Agreement, cumulative earnings in the most recent three year period and projections showing future taxable income at December 31, 2012, we concluded that the valuation allowance was no longer required and the $18.9 million valuation allowance was reversed. As a result, the financial results for the first quarter of 2013 reflect federal income tax expense, at an effective tax rate of 31.59%.

FINANCIAL CONDITION

Summary: Due to the continuing soft economic conditions, we have been focused on improving our loan portfolio, reducing exposure in higher loan concentration types, and improving our financial condition through increased liquidity, diversification of credit risk, improved capital ratios, and reduced reliance on non-core funding. We have experienced positive results in each of these areas over the past three years.

Total assets were $1.51 billion at March 31, 2013, a decrease of $53.3 million from $1.56 billion at December 31, 2012. This change reflected increases of $3.3 million in securities available for sale and $25 million of interest-bearing time deposits in other financial institutions, offset by declines of $1.3 million in our loan portfolio and $77.0 million in cash and cash equivalents. Total deposits declined by $54.9 million due to normal seasonal deposit usage and other borrowed funds were down by $1.2 million at March 31, 2013 compared to December 31, 2012.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $149.3 million at March 31, 2013 compared to $226.4 million at December 31, 2012. The $77.0 million decrease was primarily the result of normal outflow of the seasonal build-up in deposits we typically experience toward year end. These balances have also been elevated due to high short term balances maintained by our large deposit customers. We expect our balances of short term investments to remain elevated until loan demand materially increases and more attractive investment opportunities emerge.

Interest-bearing Time Deposits with Other Financial Institutions: We opened two time deposit accounts with our primary correspondent bank in the first quarter of 2013, each in equal amounts totaling $25.0 million. One of these deposits matures within 12 months and the other within 18 months, and both provide a higher interest rate than federal funds sold or other short-term investments.

Securities Available for Sale: Securities available for sale were $126.8 million at March 31, 2013 compared to $123.5 million at December 31, 2012. We began rebuilding our investment portfolio during the second quarter of 2011. The balance at March 31, 2013 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. We expect to continue to reinvest excess liquidity and selectively rebuild our investment portfolio.

Portfolio Loans and Asset Quality: Total portfolio loans declined by $1.3 million in the first quarter of 2013 and were $1.05 billion at both March 31, 2013 and December 31, 2012. During the first quarter of 2013, our commercial portfolio decreased by $6.0 million while our consumer and residential mortgage portfolios increased by $3.4 million and $1.3 million, respectively, as a result of our initiative to increase these portfolio segments to further diversify our credit risk.

We also saw an increase in the volume of residential mortgage loans originated for sale in the first quarter of 2013 compared to the same period in 2012. Residential mortgage loans originated for sale were $29.8 million in the first quarter of 2013 compared to $26.5 million for the same period in 2012. This increase was primarily due to market conditions and our focus on increasing our residential mortgage lending volume.

- 39 -

Index

Our commercial loan portfolio balances declined in recent years reflecting the continuing weak economic conditions in West Michigan and our interest in improving the quality of our loan portfolio through reducing our exposure to these generally higher credit risk assets. We have focused our efforts on reducing our exposure to residential land development loans, diversifying our commercial loan portfolio and improving asset quality. We believe our loan portfolio has stabilized. During the fourth quarter of 2012, we achieved growth in our commercial loan portfolio for the first time since the fourth quarter of . . .

  Add MCBC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MCBC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.